Kerr v. Waddell
| Decision Date | 13 September 1994 |
| Docket Number | CA-TX,No. 1,1 |
| Parties | Clark J. KERR and Billie Sue Kerr, husband and wife, Susan Moran, Steve Allen, and John Udall, on behalf of themselves and all persons resident in Arizona who were employees of the United States Government in any one or all of the years during the period 1984 through the present and who paid Arizona income taxes on federal retirement contributions for any of such years, and all members of the certified class, Plaintiffs-Appellants, Cross-Appellees, v. Paul WADDELL, individually and as Director of the Department of Revenue of the State of Arizona, Craig Cormier, individually and Assistant Director of the Arizona Department of Revenue, and all unknown agents, employees, successors in office, assistants and all others acting in concert with them or at their direction, and the Department of Revenue of the State of Arizona, Defendants-Appellees, Cross-Appellants. 92-0010. |
| Court | Arizona Court of Appeals |
Voss, J., concurred in part and dissented in part, and filed opinion, and dissented from denial of defendants' motion for reconsideration.
On Motions For Reconsideration or Clarification and For Attorney Fees and Costs
Bonn, Luscher, Padden & Wilkins, Chartered by Brian A. Luscher, Paul V. Bonn, Randall D. Wilkins, Phoenix, and O'Neil, Cannon & Hollman, S.C. by Eugene O. Duffy and Gregory W. Lyons, Milwaukee, WI, for plaintiffs-appellants.
Grant Woods, Atty. Gen. by Gail H. Boyd, Patrick Irvine, Asst. Attys. Gen., Phoenix, for defendants-appellees.
This is an action by federal employees Clark Kerr, Susan Morgan, Steve Allen, and John Udall (collectively, "the taxpayers") seeking relief under 42 U.S.C. section 1983 (1988) against the director and assistant director of the Arizona Department of Revenue ("ADOR"), both individually and in their official capacities, and ADOR itself (collectively, "defendants") for discriminatory taxation.
Since 1985, the effect of Arizona law was to tax 100 percent of federal employees' mandatory contributions to federal retirement plans, while exempting from Arizona income taxation most state and local governmental employees' retirement plan contributions. The taxpayers filed for themselves and on behalf of all other residents of Arizona who were employees of the United States government and paid Arizona income taxes on their federal retirement contributions during the period in question. The taxpayers assert that Arizona's scheme for income taxation of mandatory contributions to federal, state, and local governmental retirement systems violates the federal constitutional doctrine of intergovernmental tax immunity codified in 4 U.S.C. section 111 (1988).
The Maricopa County Superior Court ("tax court") partially agreed with the taxpayers. It granted the individual taxpayers and the taxpayer class partial declaratory relief on their challenge to Arizona's scheme of taxation of governmental retirement plan contributions. The tax court, however, denied the taxpayers' claims for refunds of alleged overpayments of state income tax and for injunctive relief. Additionally, the tax court granted summary judgment in favor of the individual defendants on the taxpayers' claim for 42 U.S.C. section 1983 damages. The taxpayers appeal.
We reverse the tax court's judgment in part, affirm in part, vacate in part, and remand for further proceedings consistent with this opinion. We summarize the questions on appeal, and our answers to those questions, as follows:
1. Does a violation of the doctrine of intergovernmental tax immunity give rise to an enforceable right under 42 U.S.C. section 1983? Yes. Private individuals who are subjected to discriminatory taxation because of a violation of the doctrine of intergovernmental tax immunity may claim relief under section 1983.
2. Did the tax court lack jurisdiction over the taxpayers' refund claims because the taxpayers failed to exhaust their administrative remedies before ADOR and the State Board of Tax Appeals? Yes. We resolved a similar issue against the taxpayers in Estate of Bohn v. Waddell, 174 Ariz. 239, 848 P.2d 324 (App.1992), cert. denied, 509 U.S. 906, 113 S.Ct. 3000, 125 L.Ed.2d 693, reh. denied, 509 U.S. 941, 114 S.Ct. 15, 125 L.Ed.2d 766 (1993).
3. Does the doctrine of exhaustion of administrative remedies apply to the taxpayers' section 1983 claims for damages and for injunctive relief? No. We established a rule against administrative exhaustion in Zeigler v. Kirschner, 162 Ariz. 77, 83, 781 P.2d 54 (App.1989). We see no reason to adopt a different rule for section 1983 class action challenges to an unconstitutional taxing statute.
4. Did the tax court properly rule that Ariz.Rev.Stat.Ann. ("A.R.S.") section 43-1022(2) (1980) (amended Supp.1993) was unenforceable because it violated the intergovernmental tax immunity doctrine? Yes. Section 43-1022's exclusion from Arizona gross income of state and local employees' contributions to retirement plans not "picked up" by the employer under section 414(h) of the Internal Revenue Code ("I.R.C.") discriminates against similarly situated federal employees in violation of 4 U.S.C. section 111 and the doctrine of intergovernmental immunity.
5. Did the trial court abuse its discretion in declining to enjoin further enforcement of A.R.S. section 43-1022(2)? No. The refusal to grant injunctive relief was proper because of the legislature's later repeal of the exclusion and the trial court's ruling on the merits that Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), was not retroactive. 1
6. Did the trial court err in sustaining A.R.S. section 43-1001(2) (Supp.1993) against the taxpayers' challenge? Yes. By excluding state and local employees' retirement plan contributions from Arizona gross income, while at the same time including federal employees retirement plan contributions in Arizona gross income, section 43-1001(2) violates 4 U.S.C. section 111 (1988) and the doctrine of intergovernmental tax immunity.
7. Did the tax court correctly decline to declare that the taxpayers were entitled to be exempted prospectively from Arizona income taxation of their contributions to federal retirement plans? Yes. The legislature may comply with the mandate in Davis by withdrawing benefits from the favored class as well as by extending benefits to the excluded class. Here, the legislature may amend section 43-1001(2), as it has amended section 43-1022, to eliminate an income tax exclusion for contributions to state or local retirement plans.
8. Did the tax court err in granting summary judgment in favor of the individual defendants on the taxpayers' 42 U.S.C. section 1983 damages claim based on qualified immunity. No. The retroactivity of Davis remained unsettled until Harper. Likewise, the application of 4 U.S.C. section 111 to employee retirement plans cannot be said to have been "clearly established law" until now. Thus the individual defendants were entitled to qualified immunity for their acts in enforcing the state's income tax scheme.
A long-standing principle once prohibited states from taxing federal instrumentalities. Estate of Bohn v. Waddell, 174 Ariz. 239, 244, 848 P.2d 324, 329 (App.1992). This principle became known as the doctrine of intergovernmental tax immunity. Id. At one time, neither federal nor state governmental entities could tax the employees of the other. Id. Later, courts began to limit the doctrine of intergovernmental tax immunity. Id. And, when Congress passed the Public Salary Tax Act of 1939, it specifically codified the requisite nondiscriminatory treatment for intergovernmental taxation. See 4 U.S.C. § 411 (1988).
In Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), the United States Supreme Court invalidated Michigan's income tax scheme under these principles. There, Michigan taxed retirement benefits paid by the federal government but exempted from taxation all retirement benefits paid by the state or its political subdivisions. Id. at 805-06, 109 S.Ct. at 1502-03. The Supreme Court held that a tax "favoring retired state and local government employees over retired federal employees" violated 4 U.S.C. section 111 and the principles of intergovernmental tax immunity. Id. at 817, 109 S.Ct. at 1509.
Later, after other states refused to accord full retroactive effect to Davis, and after the Arizona Tax Court ruled in this case that Davis did not apply retroactively, the United States Supreme Court held that Davis does apply retroactively. Harper v. Virginia Dep't of Taxation, 509 U.S. 86, 113 S.Ct. 2510, 125 L.Ed.2d 74 (1993). Although in Harper the Court did not order a refund, it stated that "the Constitution requires Virginia 'to provide relief consistent with federal due process principles.' " Id. at ----, 113 S.Ct. at 2519 (quoting American Trucking Ass'n, Inc. v. Smith, 496 U.S. 167, 181, 110 S.Ct. 2323, 2332, 110 L.Ed.2d 148 (1990) (plurality opinion)). The Court noted that "a State may either award full refunds to those burdened by an unlawful tax or issue some other order that 'create[s] in hindsight a nondiscriminatory scheme.' " Harper, 509 U.S. at ---- - ----, 113 S.Ct. at 2519-20 (quoting McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 40, 110 S.Ct. 2238, 2252, 110 L.Ed.2d 17 (1990)).
After the Supreme Court's decision in Davis, the taxpayers filed a complaint in the tax court. The taxpayers are current and former federal employees who paid Arizona income taxes within a four year period on their mandatory contributions to federal retirement plans. 2 Neither the individual taxpayers nor the proposed taxpayer class prosecuted claims for...
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